Toronto’s Rental Supply Is Going To Take A Hit From More Bank of Canada Rate Hikes!

Toronto's Rental Supply Is Going To Take A Hit From More Bank of Canada Rate Hikes!


Here’s a topic that’s probably on your mind if you’re looking at real estate: how will another rate hike affect our real estate market that’s highly sensitive to interest rates?

The rate decision is tomorrow but honestly, even if doesn’t happen tomorrow, everyone expects it to happen one way or another this year so it’s already fully priced into the bond market. What this means is that we’ve already seen this reflected in fixed mortgage rates too, and now we’re just waiting to see the lagging housing market take these changes into effect.

What we expect this time around is that it won’t just affect home prices but it’s going to continue to trickle into the rental market, which then might end up getting support back to home prices. 

How does this work? That’s what we’ll talk about in this video. Let’s get started!

Relationship Between Interest Rates & Real Estate Prices

In just a matter of weeks, we saw a significant shift in bond yields and this pushed 3 year fixed mortgage rates from 5% at the end of April to 6%+ nowadays. 

But here’s the thing – because of rate holds from before this change, we haven’t seen the full impacts of this yet in the housing market. If someone started a rate hold starting the end of April, rates might be held until end of August, so that’s why the housing market is definitely lagging rates these days and we expect prices to continue to soften throughout summer.

It’s also important to note is that even though real estate prices are impacted by changing rates, it’s not black and white with math. The reality is that emotions are involved with buying a home, and a lot of people are still eager to buy homes. The other thing to keep in mind is that with inflation rising, we’re been also seen rising wages and rising rents – these have been helping to support home price growth too.

So here are some price trends with Toronto semis.

From January 2022 to January 2023, when 3-year fixed rates surged from 3% to 6%. If you look at how prices should be impacted purely by interest rates, then prices should go down from $1.5 million to $1.05 million to keep affordability the same, that’s a 30% decrease. However, the actual price experienced a less severe decline, dropping to $1.15 million.

Then, from January 2023 to April 2023, as 3-year fixed rates decreased from 6% to 5%, we witnessed a price reversal. The expected price should go from $1.15 million to $1.3 million, or a 13% increase. But prices actually went to $1.4M, which was also $100K higher than what math suggested it should be.

Who's Selling These Days?

Now, rates went up again from 5% to 6% from end of April to July 2023 and we haven’t seen the full price effects yet. Prices should soften, but we don’t really know by how much.

As much as home prices are affected by higher rates, not everyone is as sensitive to it depending on how much debt they have on their homes. And if there’re not as sensitive to it and if there’s no immediate need to sell, home owners will be holding off on selling given this higher interest rate environment.

Investor freehold owners who are getting market rents are also likely fine. Higher rents have been supporting higher rates and so holding power is still pretty strong.

The reality is that the bulk of those who are selling these days are investors who are getting much lower than market rents but still feel the impact of higher rates – this combination ends up being much tougher to carry for another year like this so these are the most likely sellers in this current market.

Who's Buying These Days?

On the other side of the equation, a big majority of buyers are end users who are buying out of need. And because more homes are rental properties these days, we end up seeing more existing rentals because converted back into end user homes in this current market. 

And this ends up reducing rental supply. When rental supply shrinks, there will be more competition to the existing tight rental market which will probably take rents even higher. And then higher rents, will continue to help support higher property values.

Another group of buyers might being investors who are willing to buy existing rentals with lower rents, because they see the potential for value-add once they turn over existing low rents. 

But because of the much higher risk, work, and money involved, the value-add has to be worth it and that’s where the bulk of the deals are these days. Once tenants turn over, property values will also go up and give further support to home prices.

What This Means For The Rental & Housing Market

We will probably see prices soften with higher rates. And if there’s a motivated seller who has a tenanted property with low rents, you might get a deeper discount but this motivation to sell isn’t the case for all home owners. 

Fundamentals continue to give good support to home prices and so we don’t expect this trend to make real estate free fall from here on like what happened last year.

If you’re looking to buy, the best advice is to 

  1. Familiarize yourself with the market so you know what’s actually a good deal
  2. Get financially ready so you can pull the trigger once there is a good deal

How We Can Help

We are in a time where you can pick up a property for slightly lower than the highs set this year because rates have climbed. And if you’re willing to take on more rental risk, then you might even end up getting a better deal.

These types of deals are not on the market all the time, but when they do, we know where they are.

We’re a real estate also brokerage that specializes in buying & selling Toronto freehold investment property deals. And if you need help getting started, just take the first step by booking a discovery call with us!

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